Forever Chemicals Present Significant Challenges for Commercial Real Estate
By Gary B. O'Connor October 9, 2024 9:46 am
reprints
In recent years, PFAS — polyfluoroalkyl substances, better known as “forever chemicals” — have emerged as a major topic of concern for land and business owners as well as environmental and real estate professionals amid greater regulatory scrutiny of the management of these substances. A number of events this year have increased the public’s awareness of PFAS and raised concern among real estate professionals regarding the legal and liability impacts of PFAS on real estate.
In February, a court approved a $1.1 billion settlement of a class action against Dupont for the negligent manufacturing, handling and disposal of PFAS, and the withholding of information regarding their harmful effects on human health and the environment. Even more impactful on the commercial real estate community were the Environmental Protection Agency’s regulatory actions during the first half of this year.
Together, they send a strong signal that PFAS chemicals will present unique and increasing challenges to real estate owners and those working in the real estate industry.
PFAS are a large, complex group of synthetic substances first created in the 1940s. Thousands of these chemicals are used in consumer, commercial and industrial products, and the substances and their management will pose one of the greatest environmental challenges of our time.
There are a number of factors that make PFAS both unique and extremely challenging. For one, it’s estimated that certain PFAS chemicals can take more than 1,000 years to break down, and they migrate easily, leading to long-term contamination of soil, groundwater and air. PFAS substances are ubiquitous. They have been discovered everywhere, from the largest metropolitan areas to the most remote islands. PFAS can be found in the blood of most people around the world, and are associated with a whole suite of serious health risks.
The broad range of commercial and industrial properties potentially contaminated with PFAS necessitates thorough environmental assessments for real estate transactions. Although the regulatory and financial exposure associated with these contaminated properties is far from clear at this point, it is certain that as regulators increase their efforts to manage this unique group of contaminants, transaction costs will increase and property values for some properties will be negatively impacted.
The EPA’s new drinking water standards for PFAS, announced in April, will have a profound impact on the cost of operating public water systems. They will also impact real estate development projects with small community water systems or private wells. As a practical matter, developers will need to investigate for PFAS and ensure that the drinking water does not contain any detectable PFAS.
The EPA designates two specific types of PFAS (PFOS and PFOA) as “hazardous substances” under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which empowers federal regulators to monitor hazardous materials in the environment. This exposes owners of PFAS-contaminated properties to potential strict liability lawsuits under CERCLA by private parties and regulators for cost recovery and contribution for PFAS contamination cleanups. The final rule underscores the EPA’s intention to clean up PFAS-contaminated properties.
Moreover, the increased liability exposure imposed on property owners by the final rule will most likely complicate real estate transactions and require comprehensive due diligence to mitigate risks.
The EPA’s recent actions will have an immediate impact on certain real estate transactions, too. Typically, a prospective buyer will conduct a Phase I environmental site assessment (ESA) to be eligible for certain environmental liability protections under federal and state laws. It also gives the purchaser a limited understanding of the potential environmental conditions related to the property.
In certain instances a Phase II ESA will be required. If PFAS are found, even at trace levels, the purchaser may request additional testing to determine the scope of contamination, further increasing due diligence costs and time. The lack of comprehensive regulatory standards in regard to the level of PFAS contamination requiring remediation at a property, and the scope of remediation required, will undoubtedly create additional uncertainty for prospective purchasers.
Based on the new drinking water standards promulgated by the EPA, purchasers are likely to see remediation action levels much lower than other regulated contaminants. As a result, purchasers will certainly request more concessions, or walk away from transactions.
The financial community’s response to PFAS-contaminated properties also remains a critical concern. Lenders may reassess their willingness to finance properties contaminated with PFAS, reflecting their concern for the broader economic impacts on property values.
Gary B. O’Connor is co-chair of the real estate, energy, environmental and land use practice at the Connecticut law firm Pullman & Comley.
